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Deferred tax explained

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What are deferred tax liabilities, and what is the difference between deferred tax liabilities

and deferred tax assets?

Deferred means that something has been postponed, and liabilities means that we owe something.

In this video we explore the underlying concepts of tax deferrals, walk through the journal

entries for deferred taxes, and take a look at the balance sheets of three well-known

companies to see what is driving their deferred tax assets and deferred tax liabilities positions.

Here's the main concept for tax deferrals: the profit that you recognize for "book" or

financial accounting purposes, is not the same as the profit you recognize for "tax" purposes.

One and the same company can have two profit numbers in the same year: the profit per US GAAP

or IFRS that is reported to the stock market, and the profit per individual country

tax rules that is reported to the tax authorities.

When you prepare financial statements for "book" purposes, or review financial statements

prepared on this basis, then remember that "book" profit is the primary perspective,

and "tax reality" needs to get fit in.

You match tax expense in the income statement to "book" profit before tax, and record deferred

tax assets and liabilities on the balance sheet for temporary (timing) differences between

"tax" and "book" accounting.

Let's review what that looks like in journal entries.

If "book" profit equals "tax" profit, then the journal entry for recording the income

tax expense is debit income tax expense in the income statement, and credit income tax

payable on the balance sheet, for the same amount.